How Do You Know If You Have Product-Market Fit?

This is Part 12/18 in the series “How to Build an Innovative New Product or Company” on the topic of spending time with your users to determine product iteration and early direction

“Product-Market Fit”: the moment when a startup finds that their marketing message, sales process, and product are all aligned perfectly against an unmet market need and customers run to their door, money in hand.

I was at a conference a few months ago and an audience member asked the speaker, “how do you know if you have Product-Market Fit?” His response was, “when your product is flying off the shelf faster than you can fill the orders.” I doubt the answer was helpful, but I think the problem may have been in the question that was asked.

The better question is: “How do I know if I’m on a path to get to Product-Market Fit? And how do I get on such a path if I’m not?”

I recommend splitting it into “Product-Buyer Fit” and “Product-User Fit”

You know you have “Product-Buyer Fit” when…

  • your sales demo/value proposition gets you interest, meetings, and builds your sales pipeline
  • buyers rate the pain you are addressing and your solution as 8 or 9+ on a scale of 1-10
  • buyers become more engaged and more excited as you step into your demo during a sales meeting

Product-Buyer Fit may be all you need to close your first few deals.

You know you have “Product-User Fit” when…

  • your users are using your product as often as you intend, getting the value from it you like, having the experience you expected, and having the impact they want
  • your users tell their friends and colleagues about it and offer to help get others on board

As you’re iterating on your product, keep your source(s) of advantage as your north star
If you have a choice, for example, in designing your product or marketing website in a way that highlights your sources of advantage versus another way that hides it, choose the former. (Sources of advantage are the main component of Step #3 of the “4 Steps to Develop a Strategy”).

For products I’ve developed, analytics has always been a major source of differentiation and so keeping analytics insights front and center in the product and sales demo has been a goal.

While you’re getting product-buyer/user fit, optimize for learning and speed of learning
The currency of a startup is how much it has learned that others don’t know.

Add features based, not on what users say, but on what will make a difference. Work with mockups and “false-front” product features. The goal is shortening cycle time: getting as fast as possible from user feedback to a “false front” feature that gets deployed, usage levels measured, and user feedback collected. How fast can you overhaul the UI of your product? If, six months in, following a major engineering investment, the UI is built out and locked in to where you can only consider incremental changes, you’ve not set yourself up to succeed.

The main thing you want to learn is what is the core feature and idea to build out—and product-buyer/user fit becomes a clear north star that allows you to determine what not to build and why. As Hewlett-Packard co-founder David Packard said, “More businesses die from indigestion than starvation”.

The best path to Product-Market Fit is to spend as much time as possible with your users

Spending time with users is a core tenet of the Lean Startup model, but how much time do engineers, product designers, and entrepreneurs spend talking to each other versus spending time with their users?

In my current company, we built an application for nurse managers in hospitals to help save them time and recognize nurses on their teams who go above and beyond.

When we first launched it, I was lucky to live near one of our pilot hospitals. For three days a week for many months I’d meet with our users. I scheduled thirty minutes a week with each of them and they’d use the product while I took notes as they shared what they’d change, add, or correct.

The amount of actionable feedback was critical. We had enough of a working product for them to use and be able to provide feedback but it was clear we had only gotten things 60-70% right.

One example comes to mind. Weeks in after meeting with the managers many times and going through the product, one manager said to us, “this nurse you’ve highlighted for me who has been working a lot recently… she’s part-time and on Social Security. Now Social Security has a salary cap, so this nurse cannot keep working as many hours or she’ll lose her benefits. Now I see this information, I’m worried she’ll have to stop working for us later in the year.” What we do with that insight is a product decision, but it’s a great example of the level of depth that spending real time with your users can uncover. None of us, in designing a product, even with hours of interviews informing the design, could ever come up with such an intricate use case—and getting feedback like this and making use of it enhances our value for every other user in the future.

Incidentally, there was an equal amount of valuable feedback and corrections proposed by our own internal QA team member. Even with a small team, a full-time QA person is exceptionally valuable.

Before you reach Product-Market Fit, everything you do needs to be in the service of learning as much as possible about your users and what they’re trying to accomplish

Set your goals and measure progress in terms of amount you learn (not the amount of revenue you create) in the early days.

One aspect of learning is to understand all the stakeholders around your user and buyer. Who influences them? Are there detractors—for example, who have an influence on your user, who you could also win over, thus creating a stronger ecosystem for reinforcing your product usage?

Focus on jobs the users are trying to accomplish
As popularized by Clayton Christensen, there are four types of jobs that users want to complete:

  • Functional (e.g., driving to work),
  • Social (e.g., looking like an expert or connecting with friends),
  • Emotional (e.g., feeling safe, secure, and happy; express their personality by showing off a product brand),
  • Supporting (e.g., making many small decisions as consumers, such as finding the best TV show to watch or leaving product feedback).

Not all jobs have the same actual or perceived importance. Jobs, even small ones, that occur regularly create more friction in users’ lives and are thus higher priorities for them to receive support for. The most powerful solutions solve one or two functional jobs but include social and emotional jobs. Examples include buying a bike that becomes a statement of identity or renting a movie while being part of a real-time online conversation with others who are also watching.

Users complete many jobs on autopilot. Even if your solution helps them do those jobs is better, the behavior change needed to use your product may be greater than the size of the pain. To overcome the autopilot, it helps to fit your solution into the users’ lives as seamlessly as possible. You can also advertise the dangers of continuing to do things the “old fashioned” way. Eliminate switching costs by offering to onboard users—for example, by importing the data they use from their old system into your new one to get them started. Reduce the number of features and focus on the core components that allow them to complete a job. Make sure you are helping users to complete the job they are doing much better.

Emotional jobs are particularly powerful and under-appreciated. Snapchat, for example, has built their product on allowing their users to share moments of their lives with their friends without worrying about whether others will click a “Like” button.

Stephen Wunker et al. give several examples in their book, Jobs to Be Done, based on the work of Clayton Christensen. You can’t tell what job any buyer or user are trying to accomplish by looking at what products they buy. Talk to them and ask: if you hadn’t solved this job that way, what else would you have done? For example, parents may buy move tickets for their kids on a weekend afternoon because their goal is to keep their kids entertained. The kids (as users) may want an authentic move experience; the parents (as buyers) are choosing a movie as an alternative to a playground or swimming pool.

In another example, people sometimes buy Oreos at the checkout line to stave off boredom; therefore, accessibility to mobile phones in supermarket lines has had a greater impact on last minute snack purchases than any competitive food product.

In his article “True Colors”, Malcolm Gladwell shares the story of how Alka-Seltzer launched their product to cure a stomach upset, but users also took it to cure headaches. Understanding that could not come from watching sales numbers; they had to talk to users. And it was an important insight because it caused them to change their messaging. Stomachaches are typically the result of eating too much or too much of the wrong thing: it was a user error that the user wanted the product to help them undo. Headaches are very different: they are events imposed on you. Some might argue this is a marketing insight and not a strategic one. After all, in this case, the main adjustment was the introduction of a new marketing approach claiming Alka-Seltzer cures “the blahs”, a tidy way of including both needs. But how can you have a robust product strategy if you don’t know what your buyer or user values your product to solve for them?

When looking for ways to better solve a user’s job, Wunker et al. also give a few common approaches. On the jobs that users most care about, can your product allow them to significantly…

  • Save time by doing the job 2x-5x faster?
  • Reduce complexity of a job by 2x-5x?
  • Do more 2-5 different types of jobs in a single place—as Microsoft Office does?
  • Improve the quality of the job being done by 2x-5x—as Windex does for users cleaning windows?
  • Make completing the job 2x-5x easier or more comfortable—as Slack does for reducing email communication within a company?
  • Add the completion of an emotional or social job in with a functional job?
  • Make the job completion meet the needs of more stakeholders—as McDonald’s does, branding Happy Meals for kids and coffee and salads for adults?


Is there a way to measure “product/market fit” as early as possible?

A recent article by Superhuman founder and CEO discussed how he stumbled upon a metric used by Dropbox founder Sean Ellie. The ideas is a variant of “Net Promoter Score”: simply to ask users “how would you feel if you could no longer use the product?” and then measure the percent who respond “Very disappointed.” The other two answer choices: “Not disappointed” and “Somewhat disappointed”.

If the percent is >=40%, the evidence shows you are on track to fit; if not, you’re not there yet. According to the article, the popular application Slack reached 51% in 2015, when it was just at the beginning of its upwards trajectory.

The article also claims that as few as forty responses are enough to get a directionally correct indication of this metric. Something that can be measured early and often in a startup’s growth.

An additional question to categorize the user—their role or personal as is relative to the product—helped Superhuman differentiate their detractors from their strongest supporters. Armed with that information, it can trigger the internal discussion of whether it would be better to target the product to the strongest supporters or to update the product to also win over the detractors.

. . .

All books and other resources referenced in this article

Anyone Who Claims They Have “The Perfect Sales Deck” is Missing the Point

This is Part 11/18 in the series “How to Build an Innovative New Product or Company” on the topic of creating and updating your sales pitch for B2B companies. In the prior articles, I’ve shared an approach for pitching to investors in your early days. Here we’ll discuss some ideas for pitching to potential early adopter customers.

… And the point that they’re missing is that you need many sales decks. You need one to raise funds (a pitch deck, discussed in an earlier article). You’ll need other sales decks for different audiences in a B2B selling process.

Over time, your sales deck will naturally evolve. When you’re selling to an early innovator, before your product has been fully built, it will be much more focused on the opportunity and a “imagine a world where…”-type approach. After you’ve built the product and piloted it and have had the benefit of many discussions behind you, your sales document will grow to reflect the new learning.

The best sales decks I believe are the smallest. No one likes looking at PowerPoint pages. A punchy version of your demo is one your best sales tools, especially if the product is structured around the users’ needs and buyers’ value pool.

At one point, I thought doing a good demo was all you needed. Through experience, I’ve evolved my thinking on this. You need to tell an executive audience in one slide (e.g., an executive summary), what category of thing you are, what it is you do, whom your users will be, why they will love you, and what impact you will have. You need to remind them why the problem exists, such as the challenges that their users face on a daily basis, and what the ROI of solving the challenge is. Then a demo paints the picture of how it works. The whole PowerPoint section can be done in 5-10 slides. The demo has to hit a few salient points, not cover all details and functions. And then perhaps you come back to a version of the executive summary slide that tells them again what you’ve already told them.

The Innovator’s Paradox: How can a customer say “I’ve never seen anything like this before!” and “I can’t live without it!” at the same time?

It’s a paradox. The greatest value creation opportunities are when you create something entirely new; where no market currently exists. And you know you’ve got it right when prospective customers look at your product and say, “I love it! I’ve never seen anything like this before!”

And yet, as soon as they say it, they’ve also explained why they should be in no rush to buy it from you. If they’re surviving and they’ve never used a product like yours before, how critical can it really be? Sure, it might have a large ROI, but they’ve got lots to worry about on a given day, so why do this now?

How do you bridge the gap?

You have to tell a story that the world has changed.

A sales message for a disruptive new product in the early days (e.g., pre-product build)

Do not start your sales pitches by talking about the value pool.

This is especially true if the value pool has existed for a while. You’ll lose any sense of urgency: “We’ve had that problem for a while. Why do we need to act now?” You need to create, even if artificially, a sense of urgency.

And don’t start with the problem and how unsolved it has been; that has an undertone of “what you’re doing today is wrong.” You don’t want to paint the image where you’re trying to convince a buyer that they have this huge problem and, by not solving it, they’re not doing their job. If the value pool you chose to focus on is real then you shouldn’t need to have to educate them on it.

Here’s an outline of a story that can work:

  • Team: We are a team that has been working together in the space for many years.
  • Situation (or need): We heard about this lasting problem and need from senior leaders over that time and none of the existing tools were working. We did a lot of research, including aggregating data from a consortium that we assembled and many hours of interviews, in the beginning to determine the root causes of the problem.
    • We learned the key factors that underpinned the problem and built a framework around it.
    • Getting this fixed also impacts many other larger areas of performance in your business as well.
  • Complication (or why the need is unsolved so far): New changes have created an unsustainable situation – e.g. current processes, systems, or people are being stretched to their limit.
    • (One thing I’ve observed in comparing our sales pitches around year 3 to where they were around year 1 is that we’ve built better diagrams that support these points. For example, consider building a diagram that shows your customers’ current systems today on one side … and on the other side, the emerging process and needs and how unstructured and unserved those new ones are.)
    • Your users can’t unlock this opportunity because of certain constraints and the fact that the tools they need to overcome them are not available. For example: Have you talked with those users lately? Are they always worn thin? Balancing more complexity than ever before? Have less support and help than ever before? Don’t have the time to invest in their teams or long-term planning? Have you seen those symptoms more now than ever?
  • Resolution:We have the tool you need to solve it.
    • Our solution is a product that organizes and supports these new needs.
    • It has these three core capabilities that buyers and users love. It is laser-focused on the value pool.
    • (Another useful diagram may be one that shows the steps your product takes to go from raw data through an analytics layer to serve your users in a timely and intelligent way … or similar, as it applies to your product.)
    • Then do a product demo.
  • The ROI is real. Here’s proof that we will jointly have an impact on the value pool. Sure, the proof points now may be thin, but here are some supportive quotes from users and early adopter buyers. (This connects everything back to the buyer and their value pool. A case study here is best. In the early days, before you have one, leverage the thinking from the 4 parts of your strategy, as covered in the earlier articles.)
  • Implementation will be great. Our customer success approach is holistic and ensures high adoption and utilization among your users. Technical implementation is easy and has these simple steps. (More on what a customer success/change management/user adoption approach might look like in future articles.)

The exact wording will have to vary according to your context. But after a message like this, you can step in and explain why only you can uniquely tackle this. There’s a popular article on Medium called “The Greatest Sales Pitch Deck I’ve Ever Seen” that follows a similar outline. To some extent, it also reflects the logic of the investor pitch: the solution will happen.

Note the Situation-Complication-Resolution (SCR) framework is in here. I’m convinced it is the core of most sales presentations. It’s actually the core of all good stories. If you’ve heard of a 3-act play (the setup, the confrontation, the resolution), it’s the same concept.

Translate the ROI from a number into exactly where savings will accrue
One of the ways to coax your prospects into identifying a budget urgently for your product is to enumerate exactly where ROI will take effect.

For example, in my current company, we have proof that our product generates a 15:1 ROI in reducing nurse turnover. While most prospects have been convinced of this, many are still unsure how that will translate into budget and funding for the project.

So we started to list out where the savings would accrue. For a $100k contract with a 15:1 ROI, you’d anticipate $1.5M in savings. From published research on the costs of turnover, we could then say $150k of that $1.5M would be realized in reduced use of training materials. Another $150k in reduced use of hotel costs for temporary replacement nurses, etc. In other words, the hard, measurable savings of any one of these categories alone will fund the project. Even better, these different categories may be controlled by different members of the C-suite thus providing funding access for many potential different buyers by simply reorganizing their own budgets.

Transitioning from an investor pitch to a sales pitch
Part of raising funds requires you to explain how you are well-versed in the value pool that you’re focusing on and why you are the right team to solve it. Therefore, there is a natural inclination to continue to prove yourself in later pitches to customers. For many companies, this continues for years later. Pitch decks talk about the number of customers they are serving already and show all the research the team has done into the problem as a way to build credibility. It’s probably not needed by that point; skip it. The best way to demonstrate credibility is to demo the solution you’ve built (if you have it) or to tell your story. Your buyers and users will immediately see if you understand the problem at hand, the context that the users operate in if you’re bringing a lot of unique ideas and value to the table. Let your work speak for you. In the rare case where someone pushes you on whether you’ve got the credibility or wants to understand how you disaggregated the drivers of the value pool, you can always answer them by pulling up the pages from an appendix.

Many versions of the pitch and demo

While you need to keep the overall message consistent across conversations and audiences, the examples and areas of detail you go into may vary.

If you’re meeting with a CIO you may want to highlight the ease of data integration and how you add new value to their existing systems. For a CFO, a stronger focus on user adoption rates and buyer value pool impact is probably more important. For a CHRO, you may want to allay their concerns that you are competing with data in the core HR systems that they are responsible for and are instead providing new inputs into, and new use cases for, those assets.

In a B2B sale, there are often multiple stakeholders and they all have different concerns, needs, and interests. Learning the persona of each and adjusting your message to them may be critical to getting enterprise deals done.

How the audience will respond

If they ask themselves, “can we build this ourselves?”, that’s at least acknowledgement of the value pool and your approach. Maybe one in ten customers will choose to build over buy; the rest will realize the ROI doesn’t make sense when your solution exists.

For a brand-new product category, attempt to push pricing conversations off until later in the process. They’ve never seen (let alone purchased) a product like yours, so how can they interpret your pricing? Engage them deeply on the value pool and the ROI first; pricing has to be a function of it, not of pre-conceived constructs they may have about other products that they’ve purchased before. For a SaaS company especially, price is the most important lever because most of your other costs are fixed and the incremental cost of serving a new customer are probably quite low. So not under-selling yourself on the revenue side will have the largest impact on your overall viability and profitability.

. . .

All books and other resources referenced in this article

Why Coca-Cola’s Mission Statement is the Perfect Template for Yours

This is Part 10/18 in the series “How to Build an Innovative New Product or Company” on the topic of crafting a mission and value statement

Developing (or re-imagining) a company’s mission statement can be a powerful mechanism to align and energize a company … but my guess is that it rarely fulfills that promise. It’s most often a “do-it-because-we-have-to” exercise for corporate executive retreats.

For startups, building a version of a mission statement early on can be a way to align and inspire the team around a long-term direction, especially once you’ve got a draft of a strategy (per the “4 Steps to Develop a Strategy”). Mission statements are a nice way to then step back and say, while our strategy may define the next few months or years for us, let’s set a direction for what the company could be over the much longer term, especially as we grow beyond our first product. And finally, a strong mission can be a great motivator when it comes to recruiting and hiring employees. People are no longer just looking for a job, or even a job with equity, they want to spend their life and career in the pursuit of something meaningful to them. To get great early employees, it really helps to be able to articulate what that is for you.

There are many definitions of mission and vision statements. Here I’ll build on Bain & Company’s:

Vision statement:

  • This is a “We imagine a world where…”-type statement. This is not specific to your company or its products; though presumably, your products will help get the world a bit closer to this vision.
  • I don’t think vision statements are especially helpful. Maybe marketing wants to write a sentence like this and use it. That’s fine, but there’s little strategic value in it.

Mission statement:

  • A declaration that you share with the world about why your company exists and why it is going to win customers.

A good mission statement has three parts (which mirror the core components of a strategy)

  1. The biggest view on how we will serve our buyers and users (from their perspective, not ours),
  2. How we will create an emotional connection with them and turn them into raving fans,
  3. What our unique twist will be that goes beyond product/feature/function

By coincidence, one of the oldest and most valuable brands in the world, Coca-Cola, happens to have a 3-part mission statement that follows this exact outline:

“To refresh the world…
To inspire moments of optimism and happiness…
To create value and make a difference.”

It may not be the most poetic mission statement, but I’m a fan for its directness and adherence to core concepts.

The use of the word “refresh” speaks to the goal of the product for the customer—which is why it is not worded as a purely product-oriented tagline such as “sell them drinks”.

Declaring that Coca-Cola will inspire moments of optimism and happiness is explicitly claiming the emotional connection they will make. The aim of its marketing team is then to create connections in your brain between happy moments in your life and opening a Coke (as demonstrated in their Christmas and polar bear-themed commercials).

Their unique twist is to make a difference in the world, which is an unusual goal for a beverage company. (For our purposes, we can safely ignore how effective they are at actually doing these things.)

Another inspiration for mission statements is the quote, “the first person to live to 150 has already been born,” from Cambridge University geneticist Aubrey de Grey. It paints a radical picture of progress and innovation and makes people look up and think “I could be part of that journey now”. It inspires people to believe the future is real and it’s already here.

Another tagline that I like (I’m not sure it’s officially a mission statement), is from Slack’s marketing website: “Where work gets done.” They are carving out the vision to be a complete platform for work-based communication. But they do it in a way that doesn’t put anyone on the defensive; they’re not saying that work doesn’t get done without Slack.

Here are a few thoughts on the process of building your own

Use your mission statement to define your long-term direction, not just the product you sell/are developing today. Think big in your aspirations.
Gather a few bits of information before you start, to use as material in the problem-solving sessions:

  1. Who are your end users? Who are your buyers?
  2. What do can they accomplish with your product that they can’t with others?
  3. What do you bring to them that others ignore or overlook?
  4. What do you do that makes them raving fans? How does your product make them feel?
  5. What do you and your products do for them, in their words? Talk to them and listen to their words they use.

If you’re a single product company, your mission statement should, of course, capture the essence of these things for your product. But it should be bigger than one product. It should create a direction that will determine which future products you add (or don’t add) in the future.

One way to approach creating a mission statement is to create options for each of the paths by which the company could grow.

As an example, imagine your product is a quick drive-thru oil change, focusing on busy families (e.g. you have play areas for kids). Your value pool is reducing time spent waiting.

You might imagine two vectors for future growth:

  1. Own the value pool for all your customer types, regardless of how many different products you need to add to do it.
    • Your mission statement could be to “Save drivers time in all aspects of driving—one oil change and one traffic jam at a time”.
  2. Or serve this one type of customer completely and fully, across many different metrics.
    • … “Turn chores into family moments that will inspire and nurture your kids for years to come”.

The final word can go to the former Chief People Officer at Google, Laszlo Bock:

Google’s mission [to organize the world’s information and make it universally accessible and useful] is distinctive both in its simplicity and in what it doesn’t talk about. There’s no mention of profit or market. No mention of customers, shareholders, or users. No mention of why this is our mission or to what end we pursue these goals. Instead, it’s taken to be self-evident that organizing information and making it accessible and useful is a good thing… it is a moral rather than a business goal… These bursts of creation and accomplishment were a direct result of articulating Google’s mission as something to keep reaching for, just beyond the frontiers of what we can imagine.

. . .

All books and other resources referenced in this article

How to Raise Funds for Your Startup

This is Part 9/18 in the series “How to Build an Innovative New Product or Company” on the topic of entrepreneurial fundraising, specifically for a seed round

How do you raise $5M?

The good news is—it’s possible. I’ve been part of startups that have raised between $4 and $17M. I’ve observed and advised colleagues as they’ve raised $2–5M in a few months for their first venture.

I’ve also seen entrepreneurs with great ideas and passion struggling to raise anything at all.

What’s the difference?

The main difference is (a) your strategy, (b) the record and commitment of team that you’ve assembled, including yourself, and (c) your ability to tell that story.

In terms of (a), some funds only invest in B2B companies because they know there’s high risk and cost of acquiring customers in a B2C model. Investors may also only invest in companies who are local to them and who are focused in industries that the investors know well. If your venture is one that reduces hospital patient falls, for example, you will certainly find a stronger receptive audience if you talk to investors who have been nurses or who work in hospital leadership roles because they know that the problem exists. If that’s not possible, find those people who can validate the problem and bring them on in some advisory capacity so that investors can see an independent validation of the problem and your solution. This is stronger if those advisors commit to investing as part of the round themselves.

Further building on (a) - your strategy should be anchored in a value pool. Investors prefer startups that are playing in large value pools. Having said that …

A smart entrepreneur starts with a small slice of the value pool and seeks to dominate it before expanding her reach

Investors may need a little educating on this front. If they don’t accept it from you, perhaps they’ll take it from Peter Thiel, founder of PayPal (italics are in the original) from his book “Zero to One”:

Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market. Always err on the side of starting too small. The reason is simple: it’s easier to dominate a small market than a large one. If you think your initial market might be too big, it almost certainly is.

A colleague’s startup that I was observing recently had a smart strategy: take a product where they already had a proof point and simply expand it in the first phase to dominate a $30M market. Then build on that base of usership in a second phase to expand into the full $100M+ market. There is no such thing as a strategy that says you’re going to win by getting a small part of a large market; that’s simply avoiding doing the real thinking about how you’re going to win. Unfortunately, some investors looked at the market size of the first phase and didn’t look much further.

Your goal as a business owner is to win. GM’s innovative car brand Saturn is a classic case study in half-heartedly going after a large market. GM invested only enough (in commitment, drive, and resources) to make Saturn a player in the market while all of its competitors were battling for survival. As a startup, your only option means winning in a small, winnable segment and then expanding into larger ones.

Relationships with investors

For a seed/angel round, the only other difference about how easy it is going to be is whether you have trust-based relationships in place with private investors. For a venture round, which typically applies when you have $5M+ in revenue and are looking to raise $10–30M to scale to the next level, how easy it’s going to be is based on the size of the value pool you’re going after and the strength of the team and your current revenue/customer base.

Raising money is a full-time job. It takes hours a day for weeks and months.

I’ve talked in prior articles about how important it is to have members of a founding team deeply know the buyers and the users. Raising funds is similar; if you know people who are investors, it makes things much easier. If you personally do not, consider keeping a spot on your team or your Board open for someone who can make those connections can be one shortcut.
Some companies have founders who were born into a world of connections. There’s one company I know whose founder’s grandfather started a company and that company became his grandson’s anchor customer when he went to start one. If you have close connections like that you probably don’t need to read any further.

Finding investors

One legal note: there are restrictions to how you can solicit investments. The fact that companies can raise money outside of the public markets (e.g. an IPO) is due to an exception to an SEC rule that, if you break it, will prohibit your ability to raise money privately. You’re unlikely to break this rule - just don’t mass email people suggesting that you’re raising funds.

The best advice is to go out and talk to people without your pitch deck. Get comfortable telling a story, like the outline above, in two minutes. Find local entrepreneurs and get their advice on whom to talk to. Talk to managers of local incubators. Look for companies that are in your industry and have a similar size or location as yours and look on CrunchBase to see who funded them. Note that this may only reveal venture funds; angel/seed-round investors may not be listed.

For seed-round investing especially, I have found that investors prefer to invest both locally and with entrepreneurs they have a personal connection to. Part of the reason may simply be it’s so hard for even experienced investors to really know whether a company will take off or not and so this is one good way to filter the potential options.

gust.com and AngelList (angel.co) are websites that can help match startups to angel investors although I haven’t known anyone who has successfully used them, perhaps because it’s hard for investors to filter through the many opportunities on them.

Ultimately someone will hear your story and say “I need to introduce you to so-and-so.” If that doesn’t happen, keep refining and trying. There’s no shortcut. Raising money is a lot of work - but no more work than finding a problem, building a solution, finding and serving and delighting customers… it’s all equally tough. If you give up on this step, odds are you would have given up on a later step anyway.

If you’re a company with some assets and revenue and looking to grow, can you do it with a loan? A loan avoids giving away equity. Chobani yogurt was actually started this way. Alibaba also grew without capital. “In 1995, I started my business with nothing. Capital consisted of collective willpower and teamwork. Many entrepreneurs say without money they can’t start anything. That is wrong. Entrepreneurs should be guided by responsibility and teamwork, not money,” said Jack Ma, founder of Alibaba, at Alibaba’s 5th E-Business Champions Awards Ceremony in 2008.

Be persistent but polite. People are busy. Get their cell phone number and text if you can - it tends to get a quicker answer over email. Have an update to share every three to five weeks with everyone you have in the process - sales contract you’ve signed, product updates, relationships you’ve put into place. Over time, telling a story of continued growth is a great way to get or keep a potential investor excited.

University-based and federal research funds

Many universities today have a commercialization and angel investing network. These groups are typically local investors who appear once or twice a month to hear pitches by vetted and university-affiliated startups. They may choose to invest individually or collectively.

I’ve never used SBIR/STTR grants but colleagues of mine have built companies starting with them. These are federal grant programs that offer multiple rounds of essentially free money. Specifically, they are non-dilutive funds for small companies commercializing innovative solutions to topics of interest to government agencies and which solve a large $ customer pain point. In other words, they have the exact same priorities that other investors have.

The majority of the grants/contracts are from DoD, HHS/NIH and the Department of Education. Other agencies include NASA, NSF, USDA, EPA, DOT, and DHS. For market potential, the DoD, NASA, and others may be a potential customer at the end of the program (i.e. they give you a contract); the other agencies require you to identify your customer (i.e. they give you a grant).

STTR requires a university research partner; SBIR has no such restriction. Both require that you have a team member that has the credentials (such as, but not necessarily, a PhD or a prior lead research position in a large company) to conduct the core research. With STTR, you can leverage a university partner for that requirement; SBIR requires that person to be primarily employed on your team once the grant is issued.

Total funds can reach $1.75M over three years.

Qualcomm and 23andme are examples of startups that began with these grants. Navigating the programs requires a bit of expertise but North Carolina, for example, like many states, has a non-profit small business technology development center that offers pro bono advice for startups applying for the grants.

Funding round process

Three questions they may ask are:

(1) How much are you raising?

  • To determine how much you need to raise, build out a quarter-by-quarter financial plan (although, in practice, you should aim to learn from customers and not follow a plan). What salaries do you need? When will you hire those employees? What are your expected sales? What if it takes longer for sales to materialize? If they do, how much cumulative cash will you need to make sure you don’t run out of cash and thus don’t need to raise again in an emergency? How will you spend the money? Don’t raise any more than you need; investors want you to spend the money they give you.

(2) What is the pre-money valuation?

  • Pre-money valuations for a B2B/B2C SaaS business with experienced founders with low/no revenue but with revenue projections of $5–10M over next 3–4 years are $7M-12M in my experience (as of 2018). I only mention this because this appears to be based on a market gestalt, not mathematics.

(3) How did you get your valuation?

  • There’s typically no precise mechanism to set it unless you have a few million of revenue and a history of growth, in which case a revenue multiple can be applied. If you can have a large investor early and have them set the valuation, that’s one good way to lock it in.

In the seed round stage of the companies I’ve been a part of, as well as a colleague’s round that I observed, we split the round into two tranches. Leaving the first tranche window open for, say three months, allowed anyone who was able to get their funds in at that time to do so. Anyone who committed to putting some of their funds in the second tranche, which, say remained open for another six months, allowed the company to get access to funds early while removing the pressure from all the investors to get all their funds in as quickly. Investors who committed to the second tranche but didn’t do so lost their Class A shares - even for funds put in earlier, so the risk to the startups were limited.

Another option for a first raise is convertible notes: they buy into the company now, but the pre-money valuation that applies to that investment is set only on a later round.

Securing a lead investor

All of these steps are much easier when you can say, “I have an investor who’s already committed for $250k and has set the pre-money valuation. Tranche one is going to close based on their timing in the next two to three months.” Getting investors to piggyback on someone else’s due diligence … creating a reason for moving now versus six months from now … creating the evidence of social proof … these are what get investors to go from “interesting idea” to “how and when do I get in?”

. . .

All books and other resources referenced in this article

How to Create a Pitch Deck for Investors

This is Part 8/18 in the series “How to Build an Innovative New Product or Company” on the topic of writing what used to be called a business plan

Business plans used to be the recommended way to put down the story of the opportunity as you see it and the steps that you propose. As written documents have been replaced by PowerPoint presentations broadly and as a lean / agile mentality has taken off (i.e. that you should make the first few months of a company about learning and not pretend to have all the answers and a perfect plan in advance), business plans have become less useful, even unhelpful.

Pitch decks are a simple way to explain your strategy (which should be in place before your lean startup journey), why the team you have is the best one to execute the strategy, and your request from (and proposition to) potential investors.

Building your investor pitch deck

Your document for investors should roughly have these parts:

  • Opening page
    • The five bullet-point summary showing what you will do, in terms of attracting a big value pool and creating unique value for your buyers, users, and investors.
  • What’s the value pool and how big is it?
    • One page. It’s a big problem. Lots of $. How much it costs an average buyer/customer not to solve it.
  • Why buyers have this value pool; why existing solutions don’t work
    • One to two pages. Ways people are solving it today. The economics of those solutions. The major competitors that use each approach—ideally in a simple grid showing two different dimensions that competitors can be segmented based on and that there is no one in our grid area. The dimensions can be that the product is focused on buyers versus users (e.g. as Microsoft versus Apple differentiated); the different ways to solve the problem; those that use new technologies and trends versus those who don’t.
  • What we’re going to do and why it’s different and better
    • One page on our product. A screenshot mockup is a good idea. Otherwise an investor will be thirty minutes in and say “wait a minute. What’s your product again? Is this a mobile app or what?”
  • How the market forces and trends have made right now a pivotal moment for a new approach
    • One page. Maybe a quote or example from how this trend has revolutionized another industry.
  • Who we are and why we’re the best team to tackle this value pool
    • 1-2 pages. Say a lot about the founders. Are they working full time on this company? What successes have they had in the past? If there’s a Board or set of advisors in place, who are they? How close is this new company + business model to the experiences and success of these key people?
  • What our milestones are; some projections of how we plan to grow revenue and costs
    • Assuming company will be valued at the greater of 6x revenue or 15x EBITDA (if it’s a fast-growing SaaS company), what will be its valuation in four years?
    • Potentially a page on potential acquirers.
  • What we’re looking to raise
    • How much is already locked, if applicable: the more money committed by the founders, the lower risk the investment will appear
    • The pre-money valuation

Note that almost all of these come directly from the “4 Steps to Develop a Strategy”. If you’re this far down the process and you don’t have clear, well-articulated answers to these questions, my guess is you skipped through the strategic thinking steps and no pitch deck can cover up gaps in good thinking.

Some advice for pitching to angel / seed round investors

All investors (regardless of stage and size of investment) are fundamentally looking for the same thing: to invest at an inflection point in the company’s growth that will allow them to have a meaningful part of the next few years’ growth. Investors are investing in the value pool (a real problem that exists) and in you and your team as the best people who can solve it. They’re not investing in your technology or your widget. A lot of young companies become enamored with their approach or their product; smart investors know product ideas will as customers use them.

There is a difference in whether you’re able to get connected to potential investors through a warm connection or if the outreach is cold. Ideally, it’s someone you know. In that case you can aim to have a conversation with them over coffee and share your story. If it’s a cold outreach, the investor may ask to see your pitch document in advance by email and you may have to send out many documents in order to get a few meetings.

If you’re worried about investors seeing your secrets before you even meet with them, do what the HotMail founding team did: send out a pitch that’s a more generalizable instance of your technology than the actual product. If they pass on you (e.g. because they believe your team is too junior), you learned the outcome without risking anything.

Try to meet the potential investor over coffee. Try to tell your story for the first ten minutes before opening the pitch deck. If you can avoid it, don’t send the deck in advance: they may read it and come to certain conclusions and misconceptions about it and you won’t know what those are or how to navigate them. If you can avoid using the document at all during the meeting, even better—you can keep it as a follow up to send by email afterwards. Don’t ask them to sign an NDA; investors see so many pitches they cannot do so.

Keep your document simple. Less graphics. Don’t let presentation and design get in the way of your story and the value pool. Focus on the message.

A rough outline of one effective story (of course your actual story will vary)

“I have been working in this industry for a long time—first as a buyer and a user and, most recently, a vendor. As a vendor, I saw my customers had a problem and we couldn’t solve it. The problem is large—the value pool is large. I realized I had to stop working at the vendor because the problem needed a new solution, one that could only be built from the outside. I thought, in my prior role, that the existing vendors were part of the solution; however, we were getting in the way. Ten years from now, we’ll look back and say, ‘of course that’s how this problem is solved now.’ The transition to this new approach is going to happen whether we are in on it or not. We have a chance to be in early and to shape the direction. Others may attempt this approach too but the opportunity is large enough for there to be multiple winners. This is not a hypothetical idea. It’s been proven. It’s real. We have a proof point that it’s working. What we need to do is scale it. I’ve put together the best possible team to take this on.”

The main aspects of this story, which is one you can tell over coffee, naturally lead you to the key pages in the document outline proposed earlier in this article.

The feedback you’ll get and the reasons they’ll say “no” … and what to do about it

A company I was advising recently was building a learning platform for doctors. Doctors have to take a certain amount of learning every year to remain certified. Their platform was loved by its early users because they found a way to make the learning so fast and easy. The company billed themselves as a better “annual learning” platform for doctors.

The first investor they pitched to said “no … because doctors have many free ways of doing annual learning.” At this point, alarm bells should go off for the strategist. The value pool that this company is playing in is not annual learning, it is saving busy, highly-paid doctors time. Their time is the most valuable thing they have. They either want to be billing $400/hour or to be home with their families. My advice was the company should instead position themselves as a platform for doing that. In that case, the argument that “free learning is a competitor” no longer applies.

The reasons investors will turn you down after hearing your pitch may fit into these categories:

  • The value pool is not large enough to grow a business that will be interesting to them. Hopefully this is solved because you completed the “4 Steps to Develop a Strategy”.
  • Too many potential competitors. See the anecdote above for one way to avoid this. Make sure you are positioning yourself around the value you create, not the thing you do.
  • They don’t invest in x or y types of companies, of which yours fits. For example, some funds only invest in certain industries, that are alums of their college, at a certain valuation level, or that have specific business models (e.g. B2B SaaS). Not much you can do about that objection, although, for the latter case, it’s worth reconsidering if you have chosen the best business model. Very few investors I’ve talked to will fund a B2C technology; most prefer B2B.
  • No lasting sources of competitive advantage; too open to copycats. If you’ve got a rock-solid answer to the question, “Why us? Why can’t two kids in a dorm room do this?” (from Step 3 of the 4 Steps), then you just need to make sure that you’re articulating it.

Is there value in your investor pitch deck after you complete the fundraise?

You may never refer to it again. Your strategy should be reviewed and referred to regularly and you may find value in comparing your actual milestones and cash spend to the ones you proposed. But if you are being agile in your product development and using your first few months and years spending time with customers and learning what the actual product should be, then your original plan will be out-of-date as soon as it’s written. Startups fail when they use a fixed plan and then blindly execute on it. Learning is the job of a startup, not adhering to a plan. Boards and investors may need to be educated on this. One litmus test about whether you are on the wrong track is whether, a few weeks into starting your product development, you have a clear idea when your “product” will be completed.

. . .

All books and other resources referenced in this article

How We Accidentally Fired All of Our Top Performers

Some lessons I’ve learned from growing a company

A couple of years ago, we sold our startup to a larger company. I joined the parent organization for a few months to aid with the transition and to see if there was a mutual fit for a longer-term opportunity. While I ultimately decided to leave and do another startup, I learned a lot from the experience about what the challenges of growing a company.

Our acquirer had about 400 employees and was growing rapidly.

The challenge that they found themselves in months earlier was the need to bridge the gap between a senior executive team and a young and ambitious workforce. Most members of the senior team had been with the organization for ten or more years. The average employee otherwise was in their early 20s; for many, this was their first job after college. A few experienced hires were made to fill in the director and VP levels, but the gap was still felt.

For this millennial workforce, job-hopping was considered a norm and the executive team wanted to continue to reward and encourage the top performers. One very effective mechanism that they used was to offer functional rotations within the firm so that over the course of a few years, a high-performer would have the ability to get exposure to different areas in the product and sales organizations.

The next idea was to promote the high performers. With 400 people in the company and about twenty people in the levels of director and above, more managers weren’t needed to solve any particular growth or span of control issue; the idea was to simply promote the highest performers within each working team into a formal team leader role to help retain them.

When I was pulled into the organization, there were a collection of three- or four-person working teams with a manager in each one. Those managers reported up to a director who themselves only had ten or fifteen total employees under them.

A few months later, the leadership team began to consider adjustments to the organizational model to better reflect the new structure of the company following a few acquisitions. Looking at the org chart, anyone would have raised the question about how efficient the company was being with its use of middle managers. While I’m personally an advocate for middle managers as frontline leaders, whenever you have a plethora of managers with less than seven direct reports each, the org chart tells a story of inefficiency. Before the manager promotions, these high performers were playing the role of player/coach; they were informal leaders on their teams who also were generative contributors as well. Now, from a payroll and org chart perspective, they looked like inefficiencies. So, in one fell swoop, the company made a choice that was the right one given the situation: between ten and fifteen of these formerly-top performing managers were fired.

Could this event have been anticipated? Could it have been avoided? And how can you reward young, ambitious employees, while acknowledging that promoting them prematurely is not the right path?

There have been a lot of surveys and reports in the past couple of years about how to engage and retain the millennial workforce and I have found a few principles from them to be helpful:

  • If you have a larger organization, then relocation opportunities, especially ones that provide international experience are valued. Rotational leadership programs are valued.
  • If you are a smaller organization, engaging deeply on culture, mission, and vision is valued. How many of your employees are just showing up for a paycheck? How many are truly invested in the goal of your organization? How many can even articulate your mission?
  • According to a recent Gallup poll, millennials are looking for a coach, a purpose, and ongoing interactions about their role and their future with an organization. Millennials are pushing the migration from annual performance reviews to real-time discussions, sometimes occurring via text, for example. In another example, the free food and gifts that were valued by employees twenty years ago are more likely to be considered patronizing by employees today; there is no shortcut to engaging an employee on their purpose and their role in your organization’s mission.

Acknowledge that sometimes losing an employee after a few months is a good thing, if they were not truly invested in being an exceptional member and leader of your organization. I’ve met people who joined IBM in the 1970s and showed up for work every day for thirty years; they never quit, but they also never lived up to their potential.

But what could we have done differently? The organization prematurely made managers of high performers as a retention tool. At the time it was easy to do; in the long run, it was very difficult and costly for all who were involved.

The fact that the move was relatively easy and fast to implement - from conception to execution - is the main clue that it was not a long-term solution. The commonality between all of the insights above is that they require long-term thinking and fundamental changes in perspective.
We should have pushed ourselves to move more quickly and more deliberately down a path of working with each individual team member on their own leadership journey. The organization did a great job, I believe, of setting an aspirational mission. But it takes a real change in priorities of the leadership team to work with each employee individually to understand their own career goals, to map those goals to the organization’s mission, to recognize and reward individually month-by-month as the team members contributed to that shared journey, and to articulate the set of criteria that would allow each person to take the next major step in their journey (such as a relocation, rotation, informal leadership, or promotional opportunity).

Making those changes in norms and behaviors to just avoid turnover may not prove worth it. But it is worth doing so because it pushes all leaders to be the best they can be. And for the incentive to change, we can thank a new generation of employees who are unwilling to settle for anything less.

. . .

All books and other resources referenced in this article

How to Avoid the 7 Stages of Grief When Naming Your Company

This is Part 7/18 in the series “How to Build an Innovative New Product or Company” on the topic of finding a name and URL for your new company

Finally, the entrepreneur thinks, the moment to name my new company—a chance at fun and levity!

An evanescent oasis from the eternal desert of agony that crafting my new enterprise so far has been!

A moment like the final few steps before a mountain summit—a reward so sweet for so little work only because it ruthlessly pilfers from the coffers of the thousands of steps already taken!

Sure, naming my company is a step that could be outsourced but why do all that hard work and then pay someone else for to bask in the glow of the one joyful shining moment?

Then… how quickly this step, too, dissolves into horror and chaos. Like a songwriter who, upon trying every chord progression she can possibly think of, realizes that every song has already been written.

Denial leads to anger … anger leads to bargaining, “Why, oh benevolent Lord, do You grace ‘Apple’ with such a simple name but all that is left for me is JesuitNinny.com? Where have I wronged You? What sacrifice will reverse Your decision?”

Bargaining leads to depression. You started the process of naming your company so bright-eyed and full of hope and youthful energy and now, barely able to get yourself out of bed in the morning, you are willing to prostitute your company in any way to get through the naming process with a shred of a worthy outcome.

Depression finally leads to acceptance. If there were any good names left, someone would have already found them. What you need is not a name that you’ll want tattooed with pride on your arm, but a simple .com, five to nine letters long, easy to spell, and that has some relevance to the direction/values/mission of your company, however remote.

This advice came out of going through the naming process a couple of times. My current company, Laudio, is focused on helping managers in healthcare better recognize and support their staff. The Latin root we found is “laud”, from which derives laudatory and applaud. A quick search on GoDaddy auctions found Laudio.com and then we acquired the trademark shortly afterwards. This whole naming process was done in about an hour—though admittedly after spending months on other approaches.

One nice side effect of this process was it gave us a “naming story”. Prospective customers often ask how we came up with the name and we explain the Latin root. It helps tie our mission and product together in the name, something that actually has quite a bit of value.

My advice:

  1. Find a few English words that represent that heart of your highest, grandest ambitions. For example, for a patient fall prevention product, “safety”, “lives”, “care” are all contenders. As the company grows to include areas beyond fall prevention, it won’t have to rename.
  2. As clichéd as it sounds, go to a website such as Google Translate and look for Latin or Greek roots for those words:
    https://translate.google.com/?tl=el#en/la/safety
    Here we see “cadus”, “securitas”, “salvatio”, “salutem”, “sospitas”, “gratia”
    You may need to convert Greek translations into Western alphabet characters, such as
    https://www.lexilogos.com/keyboard/greek_modern_conversion.htm
    “asphalia”, “sigouria”, “perithalpsi”, “vios”, “zi”
  3. Find a 3-5 letter root word (in English, Finnish, or any other language) that you could imagine building a name on. Ideally one that hasn’t been well used already.
  4. Go to https://auctions.godaddy.com/ and search for all available .coms that have a maximum of eight or nine letters that include that root word. If a domain name is any good, someone will have found it already and will be trying to sell it.

Companies that appear to use a similar process to this include the shoe company Zappos, from the Spanish word “zapato”.

Keep looping. I’ve tried a lot of methods and this one has been the most fruitful. Any nice sounding, reasonably short, easy to spell .com will be taken. Auctions allow you to buy one of them for $1k-$3k. You can also search for more freely available domain names of course, but my experience that is you’ll be limited to 10-13 letter names.

Say the name to people. How does it sound being said? Do people ask you to spell it?

Don’t rush into naming. You can keep yourself under a working name for a while. You can even incorporate and contract under a working name and update contracts later on. Make sure the mission and direction of the company are tightened before committing to a name. The cost and burden of re-branding later on are worth taking some added caution up front. In my current startup, we operated for about a year under a broad name (such as “Orange”) that we liked but which was so commonplace, we knew we’d have to at least tweak it to get a trademark.

Do you need a .com? Perhaps not. There is a trend to naming companies “tryorange.com” or “orangeapp.com”. The only issue here is that the odds are low that you’ll get Orange as a trademark in your industry and if you start branding and launching without a trademark, you’re liable to a lawsuit later on that will force you to change your name. If you can get the “.com”, odds are reasonable you can also get the trademark.

Working with a copyright/trademark attorney to register your name is a good step. They will search copyright databases that you can also check: http://cocatalog.loc.gov/

. . .

All books and other resources referenced in this article

How to Develop the 2nd Product Your Startup Needs: A Sales Engine

This is Part 6/18 in the series “How to Build an Innovative New Product or Company” on the topic of building a sales and marketing machine to (a) find customers and (b) teach them how to buy your product

There are two reasons why startups fail:

  1. Too much focus on a technology and not enough on a buyer and user need
  2. Too much belief in the mantra, “if I build it, the world will beat a path to my door”

The “4 Steps to Develop a Strategy” codify a simple process that makes sure #1 should never be an issue. Codifying a failproof approach to #2 is trickier. How are you going to find your buyers? Do they know they have a problem? How are you going to educate them on it if not? Are they aware of your unique solution? How are you going to educate them on it if not?

In a startup, you’re either building or selling (or both)
In your first couple of years and while you are in your first 10-15 employees, everyone should be building your products and/or selling. Those two roles parallel the two reasons startups fail listed above. It’s also why your startup needs a second product—a sales engine.

Who are our potential customers? How do we categorize them? Do we want to prioritize some more than others?
Geoffrey Moore’s great book “Crossing the Chasm” helps us here. He shares how there are five types of people when it comes to technology adoption:

Innovators

  • They want to be the first to use a technology. They will forgive its flaws easily and evangelize the most innovative aspects. They like to tinker and play around with new things. They love Segways because of the technology; they’re not bothered that Segways can’t climb stairs and thus have limited use cases in the real world.
  • How do you spot them? They are interested in the analytics and the technology much more than the business case (though they may appreciate others in their organization will need to see the business case).
  • Want to alienate them? Tell them you already have a hundred customers using your product—they’ll lose interest and go look for something that is so cutting edge it hasn’t been so well discovered yet.

Visionaries

  • They have a business problem they need solving and are willing to try unproven, but promising, new approaches in order to make major breakthroughs. They are dreamers and want to be seen as leaders in their field by tackling the biggest problems that they and their peers face. Market leaders who are also Innovators are the most powerful first customers: be willing to invest as deeply as you need to sign them up—their reference-ability is what will allow you to sign Pragmatists up later on.
  • How do you spot them? They talk about a business problem they need solved and lament how there’s no solution out there yet to do it. They like that you have no competition because you so innovative.
  • Want to alienate them? Talk about the technology/features/functions, but not the business problem.

Pragmatists (on the other side of the chasm)

  • They want to be innovative but have lower tolerance for risk. They typically only talk to others in their industry; they are unlikely to value innovative ideas of someone that sits across industry boundaries.
  • How do you spot them? They will ask for case studies, proof points, and referenceable clients. Thus, they can’t be among your first few customers—early adopters have to fill that role. They like to hear “industry standard” in your pitch. They want to see that market leaders are already using your product.
  • Want to alienate them? Not being super buttoned up about what problem you solve, why others are using it today, why those clients love it, and leading them step-by-step through a well-known buying process. Telling them you are “state of the art”. Telling them you have no competitors; therefore, you should “invent” competitors if needed.

Conservatives and laggards

  • We’ll merge these two groups into one because the message is the same: startups should avoid them. Spot them and move on as quickly as possible. Don’t spend time trying to sell to them unless you have 10%+ market share; doing so will simply frustrate both of you.
  • How do you spot them? They will ask about your market share, how big you are, how stable you are, why they should use your product relative to doing nothing, how much support you offer, and they will continually question how simple the product and buying process really is.
  • Want to alienate them? Be a startup; be unable to provide clear answers to the above questions.

For the most part, startups want to find and focus their time on Innovators and Early Adopters. Those are the buyers who are looking for the type of innovation you provide and they will be great testers and feedback partners. The “Chasm” that most startups fall into and fail to cross, the thesis of Moore’s book, is the step where you have to rebuild your messaging, marketing, sales, and support/service functions as you cross out of serving pure innovators to serving those on the other side of the chasm, who are an entirely different audience and have entirely different buying needs.

When we productize our approach to finding customers, we first need to know which category any prospective customer fits into. We need to know where we are in our lifecycle and thus, we need marketing, sales, messaging, and outreach materials that provide the right message to the right person.

Should we go after a broad customer base (e.g. international customers or people who use our product for two or more different purposes)? Or should we be focused?

Moore offers advice here too. When you are getting your first few customers and your first few million $ in revenue, you need to be focused. You need to serve customers who will be a reference for future customers—and you should keep a pool of customers (and prospects) as tightly constrained as needed such that all of your customers could be meaningful references to any other customer. In other words, don’t go international if an international customer would neither value a reference from, nor would later be helpful in providing a reference to, a local customer. Don’t go after or serve customers that use your product to solve problem Y when such a customer would neither value a reference from, nor would later be helpful in providing a reference to, any other customer who uses your product to solve problem X.

How to find potential sales leads
Here are some ideas that have worked for me:

  • Establish an Advisory Council of Market Leaders and Visionaries. Get their feedback on the product and once they are excited enough about your direction, ask if they’d be willing to make introductions for you.
  • Build a “refer a friend” function into your product.
  • See what connections you have in LinkedIn to potential buyers; whom do you know who could make a customer connection? Offer a finder’s fee if introductions are hard to get.
  • Invest time in thought leadership. Publish and share insights that buyers will pay attention to. Become a leader in the value pool you’re targeting.
  • Used LinkedIn to find people who are in the right role and current organizations.
    • Further filter based on where they used to work. If you’re trying to find innovators early on, it may help to find functional leaders who have moved industries—they can be more respected by their current executive teams as sources of innovative new ideas.
    • Can you find potential buyers who moved into a new role in the past ninety days? They may be looking for opportunities to have an early impact (the downside is that they may also not know how to navigate the buying process in their new organization).
  • If you have to send emails to someone cold (such as from an email list of from LinkedIn connections), send a short note in plain text, sharing credibility (e.g. customer impact) and asking for a referral to the right person in the company.
  • If you happen to catch them by phone, ask “Did I catch you at a bad time?” “If you were me, how would you approach your organization?”
  • Offer to go at risk. If your product is $100 and, in the early days, you don’t have the prior customer proof points, offer to sell it for $50 if they’ll put $50 in escrow. Then agree on an outcome (or process) measurement such that the escrow goes back to them or to you at the end depending on if the product was successful. This is better than offering a trial period—typically, buyers and users aren’t committed in a trial period.
  • In my experience, it’s as much work to give a product away for free as it is to get someone to pay. And people tend to undervalue what they don’t pay for.

Aaron Ross, in his book “Predictable Revenue”, tells the story of how he led Salesforce.com’s initial $100 million of revenue growth. He offers a few words of advice about sales lead generation: that it shouldn’t be done by salespeople. Salespeople are among your most expensive resources; they should not be doing your most commoditized activity. Their Rolodexes will help in their first few weeks, but what you need is a sales lead generation process that creates leads for all salespeople and is not subject to their own abilities and capacity to do lead generation.

It can take a few months to get an inside sales-based lead generation engine going, but he recommends investing in one once it’s clear you have Product-Market Fit. Dedicate a full-time role to prospecting.

Prospecting should also help prune the list of qualified leads, not just create them. Are there warning flags that hint that a potential prospect is going to be a waste of time trying to follow up with? Ross gives example flags such as, “They just installed a ____ kind of system” or they are “Know-it-alls”.

Teach your customers how to buy from you

My experience has mostly been in B2B SaaS enterprise sales to health systems. Arguably the tools you need to be successful there may be overkill for B2C, non-enterprise sales, or sales in other industries.

One devilishly important lesson is the understanding that, simply because a prospective buyer likes and wants your product, that doesn’t mean they know how to get it. It’s up to you to find a sponsor and lead the sponsor through the steps. If you’ve sold your product to ten other customers, undoubtedly you know far more than any prospective buyer at the eleventh customer about how to run the process, how long it takes, the types of roles who need to be included, and what the pitfalls are likely to be. And, frankly, you probably have far more time and mindshare to give to the process of closing the deal than the busy executive on the other side.

What you need is a playbook that you and your sales team members (as your grow and hire them) should consistently use and rely on. The playbook reminds you where you are in each conversation and what the upcoming steps should be and it provides tools you can give to your counterpart to help them through the buying process.

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All books and other resources referenced in this article

Does Your Product Only Need to Change the Behavior of a Few Users?

This is Part 5/18 in the series “How to Build an Innovative New Product or Company” on the topic of understanding what type of changes in behavior you need some or all of your users to make in order for your product to have the impact you expect and be successful

A few examples

“Change a Few Users a Lot”: Using e-learning to improve clinical outcomes in high-risk hospital-based events
In a prior company, we had a software-based platform to help doctors and nurses stay up to date with the latest standards of care in rare, high-risk events. Its goal was to improve their individual decision-making abilities, which then improved overall clinical outcomes. We sold our platform to hospitals under the premise that learning was needed by all clinicians on at least an annual basis. But how true was that?

Part of our e-learning was an assessment that was given to the clinicians before they took any learning. How they did on that assessment determined the learning they were then prescribed by the platform.

It’s true that the primary goal should be for everyone to improve a bit. Doing so creates a culture of vigilance. But a quick look at the assessment scores as they came in made it clear that it was a small group of low-scoring clinicians who created most of the patient safety risk.

So, while we publicly celebrated the incremental improvement everyone made on average through the e-learning, privately the discussions focused on what support and additional interventions were needed to shore up the small group who needed a lot more help.

This example is a case where 5% of the users caused 65% of the risk. You can also say 20% of the users are causing 80% of the risk, also known as the 80/20 rule. It’s an example of the Pareto curve, also known as the power-law distribution. It appears just about everywhere.

“Change a Few Users a Lot”: Inventing a technology to reduce car emissions
In another example, imagine you wanted to build a product or service that would reduce car emissions. You’d probably start by thinking about what you could add to every car on the road. But, as Malcolm Gladwell shares in his article “Million-dollar Murray”, 5% of the vehicles on the road contribute 55% of the pollution, according to a Denver study.

In this case, if you want to have an impact, you first need to figure out which cars these ones are (e.g. older cars or sports cars) and design a process around them. Sure, you could design something for every car out there. Perhaps doing so would lead to higher profits because you’d have a larger market to sell into. But if your goal is impact, you can’t ignore the power law.

“Change a Few Users a Lot”: Reducing the costs of the homeless
Another example in Gladwell’s article discussed the medical and policing costs incurred caring for the chronically homeless amounts to tens or hundreds of thousands per year, per person. But that’s just for those who are chronically homeless; they account for just 5% of the homeless population at any point in time. If you want to put a real dent in reducing homelessness and the cost society absorbs from the homeless, you have to start with this group.

“Change All Users a Little”: Connecting people via a social network, e.g. Facebook
Facebook is an example where, for the product to be successful, you need a large number of people to all make a small change in their behaviors (e.g. to login to Facebook and read/like/post something every day or so).

If 20% of your potential user base has to change their behaviors a lot to get 80% of the total impact …

Does your product need a component where you identify who the highest impact 5%, 10%, or 20% of users are? Is your product only going to be used by a small set of users?

If either of these are true, how does it change your market sizing? If this is a B2B product and the executive buyer realizes that only a few people on their staff will need to use your solution, will that affect your pricing?

From a pricing perspective, the ideal case is that everyone still has to use your product and you are able to claim value by the small behavior changes that result from that. Even if everyone uses your product, you would be well-advised to develop special features and interventions (on-platform and off-, such as via a client services team) specifically for the top 5%, 10%, or 20%.

How likely is it that this small set of users will change their behavior a lot? You may have to invest in hands-on client service support to get them there. There’s a general rule that, to have a product be successful, it cannot require users to change their core behaviors.

If everyone in your potential user base to change their behaviors a little bit to reach the total impact …

You need a pure product-focused solution. In the above case, the solution likely has to be a mix of products and hands-on client care support teams. Here, client care support teams won’t be as valuable as they simply can’t scale.

Such a product needs more investment to onboard users and train them on the new behaviors built into it. Such a product may find value in making social connections so that users can see the behaviors of other users as social proof.

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All books and other resources referenced in this article

Finding New Area of Growth: Lessons from Disney and DC Comics

This is Part 4/18 in the series “How to Build an Innovative New Product or Company” on the topic of how to find high $ value pools, as discussed in the “4 Steps to Develop a Strategy”

If you have an existing user and are looking for future growth opportunities, then you have two vectors to consider:

Same users + New products
e.g. find new value pools/solution for the same buyers or users you currently serve. For example, selling a Batman movie to Batman comic readers.

New users + Same product
e.g. extend your product to serve more users within your customer base, or find new buyers for your product, such as in other industries

Note that I differentiated the two choices using users, not buyers. You could structure the different options between selling a new product to the same buyer, and vice-versa, but I find considering it in terms of the user most helpful here. Specifically, because the question here is whether you want to build a platform or not.

Your product is a platform when you have earned the right to all events relating to either (a) a particular set of users or (b) a particular business objective. Over time, you can then add more capabilities.

Google is an example of (a). It has buyers (advertisers) and users (you and me). It is a platform in that once it has us as users, it prefers to offer us more (e.g. email and maps) rather than find ways to provide its core product, search, for new users (e.g. building Google search into Wikipedia). Once Google has earned the right to be in our lives as a user, it has a built-in advantage when offering us new products, especially if they have similar components, a similar look-and-feel, and/or if they talk to one another.

More common is (b). Every company has an HR system that is the single source of truth for any workflow relating to corporate HR functions: who the employees are, where they live, when they were hired, who their manager is, and so on. CipherHealth declares themselves a “patient engagement” company and is a platform for any workflow related to that business objective, which includes surveying patients when they are in the hospital on how their care and stay could be improved as well as offering training and follow ups to them after they are sent home.

One question you might want to ask yourself is: where is the battle for users’ attention likely to be greatest over the next few years. By growing in one direction (e.g. by building a multi-product platform for that user), will you have an advantage and a head start over the competition?

There are many examples of either option. One that comes to mind is DC Comics. Long stuck with a specific type of user and a specific type of product (paper-based comics), they expanded both dimensions in the 1990s. With the movie “Batman”, for example, they were able to cross-sell their current user base to a new type of product—but, more importantly, they were able to dramatically increase the types of users they were able to reach. It should be added that DC Comics was influenced in this approach by Walt Disney, who articulated it very clearly in the 1940s and 1950s: develop and leverage the connections between Disney movies, music, merchandising, comics, and experiences (e.g. Disneyland).

Some questions to help decide which direction to go in:

  • Where can you get best cross-product sales leverage?
  • Are you being pushed by the market to be more than a point solution? In other words, are your customers saying it’s too much to use your product and another product at the same time?
  • Who are your likely acquirers? Position yourself to complement them but not compete; don’t partner with others who might take you in a competitive direction.
  • Who are the major players in your industry and what are they likely to go into? Where are platforms being built and along what dimensions? In healthcare, there’s a powerhouse company Epic which started as a well-constrained Electronic Medical Records company. As it grew, it built itself to be the one-stop-shop for anything that interfaces with physicians and nurses in a hospital—i.e. it’s a platform. While it does allow third party apps on its platform, it also builds its own capabilities onto it. It is so powerful as a platform that when Epic even hints it is going to develop a particular product, any company that has a similar existing product immediately gets pinched.
  • Where can you build a platform? Where can your data streams and buyer/user access allow you to easily add on additional use cases that buyers will pay more for? One reason to position yourself as a platform is that in an acquisition or fundraise, your valuation may get “credit” for potential revenues that you have not yet established if it appears all you need is to fire up a product team to build it out on top of what you have—and there would be an easily accessible customer base waiting for it.

You might think it unusual to be considering future growth opportunities as an early step in the process to build a single company and product. But I’ve found that type of thinking is at the heart of strategy.

A strategy that leads you to a single product is one thing; a strategy that spells out the direction for a multi-year, multi-product roadmap that slowly builds a powerhouse platform while no one is paying much attention is something quite a bit more powerful. A single product can be attacked by a larger competitor encroaching into your space in a few years; a platform, on the other hand, gives you the rights to land that you are playing on today and may choose to play on in the future. All of the startups I’ve been a part of have conversations about long-term growth vectors on a regular basis. This aspect of strategy is the one that is typically most heavily informed by knowing who the other major players are and what ground they’re staking.

It is also a great way to pave the foundation for a mission and vision statement for your company.

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All books and other resources referenced in this article